The Numbers Behind Bangladesh’s Goal of Middle Income Status by 2021

This is the fourth in a series of six posts about the recent report, Bangladesh: Towards Accelerated, Inclusive and Sustainable Growth. The last post, Be Happy Yet Do Worry: Explaining Resilience in Bangladesh's Economy, explained how the economy has withstood recent shocks. The next post will look at what sort of policies it will take to achieve the goal of middle income status by 2021.

Bangladesh’s economic growth has followed a path both theory and international experience would expect. Starting from a low income level, growth initially tends to accelerate through capital accumulation in a market economy. This is what happened in Bangladesh during the four decades since independence in 1971. A recent article in The Economist rightly said, “Bangladesh has become a model of what can be done”. Progress achieved so far provides a credible basis for aspiring to be a middle income nation by 2021, as observed in the World Bank’s recent report “Bangladesh: Towards Accelerated, Inclusive and Sustainable Growth—Opportunities and Challenges”.

Would it take more than just maintaining recent growth rates to achieve middle-income country (MIC) status? It is important to be clear about how middle-income status is defined. It is based on nominal Gross National Income (GNI) measured in Atlas dollars, not real Gross Domestic Product (GDP). Economies are divided according to 2012 GNI per capita, calculated using the World Bank Atlas method. The income thresholds are: low income—$1,025 or less; lower middle income—$1,026 to $4035; upper middle income—$4036 to $12,475; and high income—$12,476 or more.

At current prices, Bangladesh’s per capita GNI would have to exceed US$1,025 to reach the lower end of “low middle income” status. Nominal Atlas GNI per capita, currently $851, will need to grow at a sustained 2.1% and nominal Atlas total GDP will need to grow at 3.5% per annum from now onwards for Bangladesh to reach the middle-income threshold by 2021, when Bangladesh will celebrate its 50th year of independence.

Given Bangladesh’s past growth achievements, this may appear like a cake walk. However, it is misleading because the income thresholds are most often revised upwards to allow for international inflation. For instance, the lowest MIC threshold increased by 35.6%—from $756 per capita in 2000 to $1,025 per capita in 2012. If this is repeated in the next ten years, the minimum MIC threshold is will rise above $1,310 Atlas GNI per capita by 2021. It is more reasonable to use this as a basis for assessing the prospect of reaching MIC status by 2021 than the prevailing threshold.

Both GDP growth and remittances will play an important role in reaching MIC status. Growing remittances have driven a wedge between GNI and GDP in Bangladesh. The difference between Atlas GNI per capita and Atlas GDP per capita in Bangladesh grew from $22 in 2004 to $77 in 2012, largely due to growth in remittances. Hence, both GDP growth and remittance growth will have to play a key role in achieving middle-income status.

If Bangladesh aims to do better than reaching just the lowest MIC threshold, then GDP growth would need to accelerate even more. Bangladesh could aim to do slightly better than just reaching the lowest MIC threshold, for example aim for US$1,450 per capita.

What is the required remittance growth rate? Keeping remittance share constant at 9% of GNI implies remittance will need to grow by about 8% per annum to achieve the $1450 target. While annual remittance growth averaged 18.5% in last eight years, about two-third of this came from growth in the stock of migrants which may not be easy to sustain year after year. A combination of growth in remittance per worker and the number of migrants could, however, sustain 8% annual remittance growth in next eight years.

If current growth rates fall short of the required rate, then future growth rates need to be higher to make up the difference. How much Bangladesh will need to grow tomorrow to reach middle income status in 2021 depends on how much it is able to achieve today. It is a moving target.

Comments

Dear senior economist Zahid Hasan, In developing world, turning middle income country, 2021 means to reach lower middle income country instead of upper or higher middle. Still we have long way to go to catch up higher figures in status. I think, todays volatility is tomorrow's growth. How important are external shocks in explaining growth matters required for lower middle income status? In corporating information about structural breaks in the key variables my research represent the macroeconomic transmission channels that shocks lead to a fall in industrial production and higher inflation. Otherwise, there is strong evidence of oil induced industrial slowdowns. The break should be rationalised in terms of widespread economic transformation involving a dramatic declaration in the space of productivity growth for resilent Bangladesh Economy.